Singapore is facing its gravest challenge since independence. As the regional crisis has spread and deepened, we have been drawn in. Our economy does not have the problems of the other countries in difficulty. Our banking system is sound. Our companies have not borrowed excessively, especially from abroad. Government finances are strong, with adequate reserves built up over many years.

Nevertheless, the collapse of regional demand, and the change in the business climate has caused our economy to slow sharply, from 6.2% in 1Q98 to �0.7% in 3Q98. We have now had two quarters of negative quarter-on-quarter growth, and are technically in recession.

The Government implemented a $2 bn package of cost reduction measures in June. These were not intended as the final package. We could not take drastic measures, such as a CPF cut, lightly. We needed to assess how events would develop. We used the time to develop the consensus necessary for stronger measures.

Through the Committee on Singapore�s Competitiveness (CSC), the Government has over the last 18 months tapped a wide range of private sector views on ways to strengthen the economy. The CSC has recommended both long-term and short-term measures to improve Singapore's competitiveness.

The long term measures are a comprehensive strategy for Singapore to invest in its human resources and infrastructure, to build up manufacturing and services, and to continue to grow and develop. The emphasis is on building new capabilities and new areas of business.

The short term measures focus on reducing business costs, to help companies to survive the crisis, and to preserve jobs. The proposal is to reduce wage costs significantly, through a cut in the employer�s CPF contribution rate and in flexi-wages, and also to reduce non-wage costs to make an overall package of $10 bn, or 7% of GDP.

The Government accepts the CSC report and the thrust of the CSC recommendations. They will not only help Singapore to overcome the present problems, but also lay the foundations for sustained growth.

The CSC has made some 300 specific proposals. We will study them individually to decide how to implement each one. In some cases we have already acted, for example with the recommendations to further develop the financial services sector, and the June package of off-budget measures.

We will implement the long term measures progressively. However, the short term recommendations call for an immediate response. The Government has worked out a substantial cost reduction package covering the key elements of business costs, as proposed by the CSC.

Let me begin with wages. Labour cost is a key component of business costs. The CSC has proposed that Singapore reduce overall wage costs by 15% from the 1997 level. This will bring our relative unit labour cost back to the position in 1994, and will substantially improve our international competitiveness. The CSC has recommended that part of this 15% should be achieved through a 10% point reduction in employers� CPF contribution rate, from 20% to 10%. This represents some 8% reduction in overall wage costs.

The National Wages Council (NWC) has endorsed the CSC proposal, and recommended that wages be reduced by 5% - 8% from 1997 levels. Together with the 10% point CPF cut, this will be sufficient to achieve the target of 15% reduction in overall wage costs. The wage reduction should be implemented through the flexible wage system, i.e. by cutting variable components of wages such as bonuses. The NWC urged employers to moderate the wage cut for lower income employees by implementing a proportionately deeper cut for the higher income executives.

The Government accepts the CSC�s recommendation to reduce the employer� CPF contributions by 10% points. Of this, 6% points will come from the Ordinary Account, and 4% points will come from the Special Account. In effect contributions to the Special Account will be suspended for the time being.

For older workers whose CPF contribution rates are less than 40%, and for pensionable civil servants receiving partial CPF, the reduction in their employer�s CPF contributions will be pro-rated.

The CPF cut will take effect from 1 Jan 99. It will remain in place for 2 years. Thereafter the Government will review the situation. The Government agrees with NWC that the rate of employer�s contribution should be adjusted upwards when the economy recovers.

The CPF cut will reduce costs by about $3.9 bn p.a.

The Government accepts all of the NWC�s recommendations, including the recommendation to reduce wages by 5-8%. We urge companies to follow the NWC guidelines in their wage negotiations and decisions on bonuses. Companies which completed their wage negotiations earlier should review their plans if their previous assumptions about the economic environment are no longer valid.

The 5-8% reduction in wages is estimated to cut costs by about $3.6 bn p.a.

As a major employer, the Government will take the lead in implementing the NWC�s revised wage recommendations for civil servants.

First, the government will reduce the Annual Variable Component (AVC) to be paid in December. Last year civil servants received 2 months of AVC: � month in July and 1� month in December. This year the Government paid � month in July, a reduction of � month. In December, the Government will pay � month AVC, 1 month less than last year. This means a total reduction of 1� month in AVC payment for the year. However, the usual Annual Wage Supplement or 13^th month payment will be paid in full.

For next year, the Government will decide on civil service annual variable payments after the NWC has published its proposals for 1999, which it usually does in May.

Second, the government will reduce the variable component of monthly salaries of officers in Division II and above. The cut will be in the Non-Pensionable Variable Payment (NPVP) that is paid monthly, and will be graduated. It will be 1% of monthly salaries for Division II officers, 2% for Division I timescale officers, 3% for Superscale officers, and 5% for Staff Grade officers. There will be no cut for junior staff at the Division III and IV levels and daily-rated employees. This reduction will take effect from 1 Jan 99.

These cuts in NPVP will be for one year, and will be reviewed at the end of 1999.

Third, the Government will suspend the normal annual adjustments to salaries of Ministers and top civil servants for a second year in 1999. The government had followed the private sector down in 1997 when the benchmark of private sector salaries had declined by 8%, but it did not follow back up this year when the benchmark rose by 13%.

For next year, the benchmark for Staff Grade I has increased by 19%, and that for Superscale G by 12%. I do not believe these large increases reflect current conditions in the private sector. The mismatch arises because of the long time lag: the 1999 benchmark is based on private sector earnings in 1997, before Singapore felt the impact of the regional crisis. The Government will study ways to reduce this time lag, in order to make public sector salaries reflect private sector conditions in a more timely and responsive manner.

All these measures will apply to both civil servants and political appointment holders. They will reduce the total civil service wage bill by $176 mn, or 6.2%. The combined effect of reductions in monthly and annual variable salary components will result in higher level officers accepting steeper wage cuts than more junior officers, in line with the NWC�s recommendation. In terms of annual pay, the cuts range from 5% for Div III and IV officers, to 10% for Staff Grade officers, including Ministers. This is separate from the CPF cuts, which naturally also apply to civil servants.

The wage and CPF reductions will affect many Singaporeans who have committed to mortgages, especially those who planned to repay their mortgages out of their CPF contributions. The Ministry of Manpower and the Housing and Development Board have studied the problem. After the CPF cut, 18% of CPF members will have insufficient monthly CPF contributions to their Ordinary Account to pay for their housing instalments. But despite this HDB has found that most HDB borrowers have been prudent, and have not over-extended themselves. They should have little problem continuing to service their loans as long as they remain employed.

The recent falls in interest rates will help to cushion the impact of the CPF cut on borrowers. Singapore banks have also stated their willingness to help customers who face problems repaying their mortgage loans, for example by rescheduling their loan repayments. Nevertheless, the Government will implement supporting measures to help Singaporeans cope with these difficulties, as we did in 1986.

For CPF members whose reduced Ordinary Account contributions will now be insufficient to pay their mortgages, the Government will allow them to use the balances in their Special Accounts to meet the shortfall in repayment caused by the CPF cut.

The Government will also introduce a Bridging Loan Scheme for members who have depleted the savings in both their Ordinary and Special Accounts for their monthly repayments. The loan will be at a concessionary rate of the CPF interest rate plus 0.1%. The scheme will apply to private property mortgages, as well as HDB flat owners paying HDB market interest rates, i.e. Credit POSB housing loan interest rates, for their mortgages.

Most HDB lessees are already paying the concessionary interest rate of the CPF rate plus 0.1% on their mortgages. The HDB will take several measures to help them. For example, they may include more working family members as joint owners, in order to draw upon their CPF monies. They can reduce their monthly instalments, lengthen the term of their mortgage loan, or defer mortgage payments. Those in arrears may pay the outstanding sum by instalments. HDB will also assist applicants taking possession of new flats who are affected.

The Government will give substantial tax rebates as part of this package. Unlike in the previous recession in 1985, we are giving rebates rather than reducing the tax rates. This is because we have progressively and significantly reduced our major tax rates since 1985. For example the corporate tax rate was 40% in 1985, but is now only 26%, close to our long term target of 25%. The property tax rate was 23%, but is now only 12%. Our tax rates are now generally competitive internationally. No major changes are immediately necessary.

The Government will go as far as possible to help businesses during this difficult period. However, any tax concessions to meet the present problem should be broadly consistent with our long term taxation policies, and should not erode the Government's tax base after the crisis has passed.

To signal our commitment to help businesses, a corporate tax rebate of 10% will apply to corporate income for Year of Assessment 1999, excluding Singapore dividends. This will cost $450 mn.

The June Off-Budget Measures included a 55% property tax rebate on commercial and industrial properties for the year commencing 1 Jul 98. This 55% rebate will be extended by another year to 30 Jun 2000. HDB and JTC will pass the rebates on to their tenants and lessees. Landlords in the private sector are also urged to pass on the rebates. The exemption of property tax for land under development, which was announced in the FY 98 Budget Statement, will also continue. These measures will cost the Government $680mn.

The suspension of stamp duty on contract notes for share transactions, which started on 30 Jun 98, will be extended for another year. This will cost the Government $70mn.

Many MPs have asked for the GST rate to be reduced from 3%. However, this would be the wrong approach.

First, a reduction of the GST rate to 2% or 1% would cost the Government a large amount of revenue. The GST was introduced in order to achieve a better balance between direct taxes like the corporate tax, and indirect taxes like GST. When GST was introduced, both corporate and personal income taxes were cut substantially. The GST is therefore an integral part of our revenue structure, and not something optional which we can easily give up.

Second, from the economic point of view, the GST is a "good" tax. It is a tax on consumption, not income. Its incidence is widely and evenly distributed across all types of economic activity. So for the same amount of revenue collected, the burden of the GST is felt less heavily than other taxes. It is better to give rebates on other taxes, such as property tax, which levy a higher rate on a narrower range of activities.

Third, there is a comprehensive package of rebates for lower income households to offset the impact of the GST, which are still in effect. If our concern is the impact of the crisis on lower income households, then it is far more precise and effective to extend the GST offsets package, than to change the GST rate itself.

The CSC did not recommend changing the GST rate. However, it did propose one minor refinement to our GST scheme. It observed that the current exemption limits on Goods & Services tax for Singaporeans returning from abroad are rather generous. For travellers who are out of the country for more than 48 hours, the exemption limit is $400 for adults and $200 for children below 18 years old. For travel less than 48 hours, the limit is $200 for adults and $100 for children. This has resulted in a significant leakage of retail business to neighbouring countries, as Singaporean day-trippers shop abroad. The CSC recommended tightening the exemption limits in order to help the domestic retail trade, which is facing a protracted downturn.

The Government accepts this recommendation. The new limits will be as follows:

Many companies depend heavily on foreign workers, especially manufacturing companies. While the Government uses the Foreign Worker Levy (FWL) to regulate demand for foreign workers, to the companies the FWL is a significant cost burden.

The reduction in CPF contributions for citizens allows us to reduce the FWL while maintaining the relative wage costs between Singaporean and foreign workers, and therefore without creating an incentive for companies to employ foreign workers and displace Singaporean workers.

The Government will reduce the FWL for both skilled and unskilled foreign workers.

The reductions will take effect from 1 Jan 99. They will yield cost savings of about $204 mn p.a..

I can understand that at such difficult times, some Singaporeans feel that we should do the opposite, i.e. raise the FWL and exclude foreign workers, in an attempt to preserve jobs for Singaporeans. But this would be counter-productive. Compelling companies to recruit Singaporeans at higher cost than foreign workers or professionals can only work in the short term. But in the longer-term the companies may relocate elsewhere, or simply close down if this makes them not viable.

The best way to preserve jobs for Singaporeans is to allow firms the flexibility to employ some foreign workers, and at the same time upgrade and retrain Singaporean workers to make them productive and employable.

For the longer term, it is vital for us to continue attracting talent, because international competition will be based on the knowledge, expertise, creativity and entrepreneurship of our people. The Government has formed a multi-ministry committee, the Singapore Talent and Recruitment (STAR) Committee, with BG (NS) George Yeo as Chairman and Dr Lee Boon Yang as Deputy Chairman, to oversee this strategic effort. Its mandate covers all aspects of international talent attraction and retention, in order to make Singapore a hub for international talent, while retaining our social cohesiveness and national resilience.

Our high land cost is conspicuous to investors and is a major handicap in investment promotion. The industrial property market has softened considerably. It has fallen by about 30% since last year. Recent URA tenders of industrial land have confirmed this.

Jurong Town Corporation (JTC) will reduce its posted land rentals to reflect current market conditions. Posted rentals for industrial land will come down by an average of 24% for outlying areas and 40% for urban and suburban areas, depending on locations. Rentals for flatted and standard factories will come down by 20 � 30%.

The lower rates will take effect on 1 Jan 99. These will be permanent reductions, not temporary rebates. The revised posted rents will form a lower base for subsequent rental adjustments.

In addition, for lessees paying rentals at posted rates, there will be no rental escalation for two years, in 1999 and 2000. Thereafter their rentals will be subject to a maximum annual increase of 5.5%, reduced from the present cap of 7.6%. This does not mean that JTC will automatically raise rents by 5.5% every year. The actual adjustment will vary from year to year, depending on business conditions. Nevertheless, for lessees who prefer certainty, JTC will offer the alternative of a fixed rate of increase of 4% p.a. throughout the lease duration, regardless of market conditions.

Existing JTC lessees and tenants who are paying rentals above the revised rate will have their contractual rent reduced to the revised rates. Those paying below the revised posted rates will continue to enjoy their current rebates up to end-1999.

JTC�s rental reductions are estimated to yield savings in business costs of $230 mn.

HDB will make similar adjustments. HDB will reduce rentals for industrial land lessees, and rents of commercial and industrial tenancies which exceed the new posted rates, through contractual rent revision or rent rebates. For commercial and industrial tenants paying above posted rates, the rebates will be subject to an overall rebate cap of 20%. For land lessees and tenants of industrial factories, workshops and commercial properties who are paying below the new posted rates, HDB will continue their existing rebates until Dec 1999.

HDB�s reductions will contribute savings of $76 mn.

Transport and communications are a vital sector of our economy, and form an important component of business costs. We will reduce a broad range of costs in this sector, spanning air, land and sea transport as well as telecommunications, in support of the efforts to bring down overall business costs. The reductions will amount to $790 mn.

The Government�s measures to restrain ownership of vehicles have been effective in controlling congestion. But ownership measures have been a blunt instrument, which cannot distinguish those who add to congestion from those that do not. The high ownership charges that are necessary have added to business costs. With Electronic Road Pricing (ERP), we are able to shift emphasis from ownership to usage management measures. This should enable us to achieve the same effect in terms of controlling congestion, but using lower taxes and charges.

Therefore the Government will not be slowing down the implementation of the ERP system, or giving any rebates on ERP charges. It will press on to expand the ERP system to better manage traffic flow. This will allow us to reduce ownership charges and thus the overall cost of operating vehicles. However, reduction of ownership charges, especially upfront costs such as the customs duty and ARF, cannot be done too suddenly, as this would affect the asset value of existing vehicles.

For now, government will reduce the customs duty on cars from 41% of OMV to 31% of OMV. The customs duty for new taxis will similarly be reduced from 17% to 7% OMV. This will take effect tomorrow, 25 Nov 98.

For the first phase of ERP, the Government gave a rebate on road tax of $200 per PCU. For the second year, Government plans to grant a larger road tax rebate of $250 per PCU. This will take effect from 1 Sep 99, in tandem with the expansion of the Electronic Road Pricing system under Phase 2.

Excise duties on petrol and diesel are revenue items, but they are also a traffic management tool, albeit a blunt one, that helps to discourage excessive use of cars and to promote greater use of public transport. Excise duty on high-speed diesel is 7.4 cents per litre. Petrol excise duty is currently 46% of pump price, subject to floor rates which vary for the different grades of petrol.

With the ERP, we will completely remove the excise duty on high-speed diesel. We will also reduce petrol excise duties rate from 46% to 40%, and also cut the floor rates by 7 cents per litre. Since at present petrol prices the floor rates are effective for most grades of petrol, the overall result is to reduce pump prices by at least 7 cents per litre.

This will take effect from tomorrow, 25 Nov 98. The Government expects the oil companies to pass on the savings arising from the reduction of excise duty fully and promptly to motorists.

These reductions in land transport costs should yield savings of $320 mn p.a..

The Maritime and Port Authority will extend a 20% port dues concession for container ships, and give a similar concession for harbour craft, with effect from 1 Jan 99. PSA, now a corporatised entity, has also agreed to give a one time 10% rebate on lift-on/lift-off charges, local container store rents, Keppel Distripark rents, office properties rents, commercial warehouses rents, wharf handling and local store rents at the Multi-Purpose Terminal, all with effect from 1 Jan 99. These are estimated to yield business savings of $32 mn p.a.

The Civil Aviation Authority of Singapore (CAAS) will be giving a 10% rebate on landing fees for airlines with effect from 1 Jan 99. It will also extend rebates currently enjoyed by airport retailers for another 12 months beyond Jun 99. These are estimated to yield business savings of some $57 mn p.a.

Telecommunications form a significant component of business costs, especially for information-intensive activities like finance and banking. Telecommunication tariffs have been falling steadily in Singapore, as in many other countries, as a result of rapid technological advances, more liberal regulation and greater competition. However, there is still scope for them to decline further.

TAS will reduce the licence fee for mobile radio-communications stations with effect from 1 Jan 99. This will mean business savings of $2 mn.

Singapore Telecom has informed the Government that it will be implementing a tariff reduction package of $340 mn, starting 1 Jan 99. This comprises two components: first, rate reductions amounting to $90 mn under the price control framework administered by TAS. Second, additional rate reductions, new calling plans, volume discounts and other schemes amounting to $250 mn. These are part of SingTel�s continued improvements in its tariff scheme in view of intensifying competition.

SingTel is a publicly-listed for-profit entity. It is making these changes in order to respond to the current economic conditions and impending competition, and to contribute to Singapore�s overall competitiveness which will in turn benefit SingTel�s business.

The regional currency realignments have made our electricity tariffs less competitive. The June off-budget package included a rebate of 0.3cts/kWh or a 2.6% reduction in the average electricity tariff. With effect from 1 Jan 99, Singapore Power will increase the rebate on electricity tariffs from 0.3 cts/kWh to an average of 1.3 cts/kWh, for a period of 2 years. However part of this rebate will be used to compensate the higher fuel costs incurred by Singapore Power, so the net rebate to consumers will average 0.9cts/kWh, or a reduction of 7.7% in electricity tariffs.

The net rebate will vary somewhat between different consumers, because PowerGrid will be unbundling the charges for the use of the electricity grid, to reflect actual costs incurred by the different categories � Extra High Tension, High Tension, and Low Tension. Singapore Power will announce the details later.

Government will also remove the 2% government tax levied on household utilities bills with effect from 1 Jan 99. The electricity tariff rebate and the removal of the government tax will yield cost savings of $372 mn p.a..

The Government levies a multitude of rates and fees. We will not freeze or reduce them across the board. Each of these levies has its own rationale and purpose. To freeze all of them regardless of their merits will hinder the Government from making adjustments that become necessary from time to time. It will create rigidities and distortions which will impair the efficiency of our public services.

Nevertheless, the Government will review critically all its rates and fees, and lower those where there is justification. It has identified $8 mn of other fees and charges to be reduced in this package. These include rental concessions by various ministries to tenants, generally in the form of 10% rebates for one year.

One of these is the concession to hawkers paying market rents. ENV will extend the current 1-year rental rebate given to these hawkers in Jul 98 for a further 6 months to Dec 99. If despite this rebate their rental still exceeds the Jan 99 market rates, ENV will give them an additional rebate of up to 10% for 12 months from Jan 99. In effect, many hawkers paying market rents will get up to 20% off what they were paying before July 1998.

At the same time as we cut costs, we must also encourage businesses to expand. The economic agencies will work with companies to support their promotion and marketing efforts.

To spur more investments in both manufacturing and services, the Government will reintroduce the Liberalised Investment Allowance Scheme, which it used in the 1985 recession. Investment allowance of 30% will be liberally granted for investments in productive equipment used for qualifying activities. These activities include manufacturing, engineering and computer related services, as well a wide range of other specified services. For investments which meet more stringent requirements like contribution to value added, a higher allowance of 50% will be considered.